East Asia’s growing demand for primary commodities – macroeconomic challenges for Latin America.

This paper analyses the macroeconomic impact of East Asia’s growing demand for
primary and industrial commodities in four Latin American countries – Brazil, Chile,
Peru and Venezuela. The paper shows that whilst the export boom has contributed to
improved external accounts in these countries, it has posed the challenge of how to
manage the surpluses. Policy makers in the region have responded by pursuing prudent
macroeconomic management policies. Venezuela is the only country that has increased
public expenditure significantly, mainly in the social sectors. A striking finding is
that in Peru, government revenues from the mining sectors are very small. A further
finding is that public investment in the four countries has not increased in line with
the increase in surpluses. However, foreign investors have demonstrated interest in
investing in the extractive sectors in these countries. This paper concludes that Latin
American countries benefiting from the ongoing upward trend in commodity prices
should do more to increase investment, especially in the infrastructure sectors. They
should also avoid excessive currency appreciation, which undermines the competitiveness
of their manufactured exports, which are the ones that really create jobs and
value added, and through export diversification contribute to reduced variability in
the terms of trade.

Research papers for the Intergovernmental Group of Twenty-Four on International Monetary Affairs and Development.
G-24 Discussion Paper No. 39